There’s been a fair amount of discussion regarding the term “Moral Hazard” of late.  Once the province of academicians and those working in the insurance world, the term has become one used by the masses – even my grocery store checker here in our metropolis of Bozeman used it (incorrectly) yesterday. 

The Editorial Board at WSJ has an interesting post up about “Moral Hazard” today – here’s the link. 

Here are a couple of interesting quotes from the piece –

Now, with big banks dropping like flies and Wall Street vaporizing amid a mortgage meltdown, every corner bar and hair salon is filled with experts on the perils of moral hazard. Everyone gets it: Cut risk down to next to nothing and some people do crazy things.

“Moral hazard” is an odd phrase. Its meaning isn’t obvious though it does sound like something one ought to avoid. “Moral hazard” dates back hundreds of years in obscurity, but its use eventually settled inside the insurance business in the 19th century. The French call it risqué moral.

Back then, it really was taken to mean that reducing risk too much exposed people to the hazard of poor moral judgments. If an insurer charged too little for a policy to replace farms in the English countryside, Farmer Brown might be less careful about cows knocking over oil lamps in the barn.

In time, the economists got their hands on “moral hazard,” and the first thing they did was strip out the heavy moral freight to make the concept value-neutral. Now moral hazard became less about judgment and more about the economic “inefficiencies” that occur in riskless environments.

We’re back to the original meaning. Losing tons of money for an institution is an economic inefficiency. Lose the nation’s financial structure, however, and moral fingers get wagged.

A worthy read.

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